ACC306WEEK2ASSGN - E14-16 Wilkins Food Products, Inc.,...

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E14-16 Wilkins Food Products, Inc. , acquired a packaging machine from Lawrence Specialist Corporation. Lawrence completed construction of the machine on January 1, 2009. In payment for the machine Wilkins issued a three-year installment note to be paid in there equal payments at the end of each year. The payments include interest at the rate of 10%. Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2011. The error had caused Wilkins to understate interest expense by $45,000 in 2009 and $40,000 in 2010. Required: 1. Determine which accounts are incorrect as a result of these errors at January 1, 2011, before adjustments. Explain your answer. (Ignore income taxes.) 2. Prepare a journal entry to correct the error. 3. What other step(s) would be taken in connection with the error? Requirement 1 The error caused both 2009 net income and 2010 net income to be overstated, so retained earnings is overstated by a total of $85,000. Also, the note payable would be understated by the same amount. Remember, the entry to record interest is: Interest expense . ................................................................................................ xxx Note payable (difference). .................................................................................. xxx Cash. .............................................................................................................. xxx So, if interest expense is understated, the reduction in the note will be too much, causing the balance in that account to be understated. Requirement 2 Retained earnings (overstatement of 2009-10 income). .................................... 85,000 Note payable (understatement determined above). ...................................... 85,000 Requirement 3 The financial statements that were incorrect as a result of the error would be retrospectively restated to report the correct interest amounts, income, and retained earnings when those statements are reported again for comparative purposes in the current annual report. A “prior period adjustment” to retained earnings would be reported, and a disclosure note should describe the nature of the error and the impact of its correction on each year’s net income, income before extraordinary items, and earnings per share. E 14-18 Installment note; amortization schedule American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the $4 million machine, American Food Services issued a four-year installment note to be paid in four equal payments at the end of each year. The payments include interest at the rate of 10%.
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Required: 1. Prepare the journal entry for American Food Services' purchase of the machine on January 1, 2011. 2. Prepare an amortization schedule for the four-year term of the installment note.
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This note was uploaded on 01/12/2012 for the course ACCT ACC305 taught by Professor Mark during the Spring '10 term at Ashford University.

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ACC306WEEK2ASSGN - E14-16 Wilkins Food Products, Inc.,...

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